Powell’s cautious comments yesterday curbed USD gains and should support currencies which offer high interest rates as their appeal also depends on how long the US interest rate will stay low. Growth opportunities in EUR and GBP against greenback are rather limited, however EM, NOK and other cyclical and commodity currencies deserve attention of investors.
Powell yesterday attempted to strike a balanced position between what the data say and the Fed's own forecasts. While acknowledging that the rise in inflation in recent months has been unexpected and that the situation needs attention, he also said that the underlying reason of growth is a "perfect storm" caused by several drivers that must soon wear off. In his opinion, the Fed should consider the rapid rise in prices as a temporary, unless, of course, it will be repeated year after year. He also believes that current inflation still falls short of the definition of “moderately above the 2% target”.
Recall that breakdown of June inflation into components showed that the two biggest growth drivers was fuel and used cars – prices of the latter in the past three months have been rising average by 9% MoM! Increased demand for fuel, due to, among other things, the effect of seasonal factors, the rally in the oil market spurred fuel prices and its impact on inflation also rose:
Prices for new cars also grew at a decent pace - 2.0% in June. Home rent, which accounts for a large share of income, increased by 0.5% MoM.
The concentration of inflationary pressures only in certain components suggests that inflation is indeed more temporary than persistent. Therefore, the impact of the CPI report on market expectations regarding the Fed was short-lived.
Powell's comments were able to stop decline in EURUSD fueled by CP report, however growth prospects are dim and instead it is reasonable to expect the price to move in a range, as the ECB has clearly outlined its position on tightening the policy - it should not be expected in the near future. The same can be said for the Bank of England. The Fed is a little closer to the beginning of tightening the policy, but more data is needed to clarify the timing, so the potential for strengthening the USD remains against low-yielding currencies - EUR, GBP, JPY. But again, markets need more data.
Weak data on the Chinese economy and easing PBOC policy stance also suggest that the process of transition to higher interest rates by other major central banks may slow. China's GDP grew in the second quarter by 7.9% (forecast 8.1%). This week, the Bank of China lowered its RRR and refinanced part of its debt under its medium-term lending program, which is regarded as increases in monetary stimulus support for the economy. In the current situation this may be viewed as a signal of slowing economy which will have repercussions for the rest of the world as well.